Question

Practice Drawing Timelines!

Purpose: This section describes how to draw a timeline and visualizing the problem being presented. It is important because a time problem that is set up incorrectly will lead to incorrect answers. For each of the descriptions below, draw the timeline on your own.
Inserted a picture of your timeline (the picture can be a jpeg or pasted in a word document).
Criteria: Full points will be based three separate timelines attached as a picture. Your work should be original and not copied, borrowed, or obtained from another student (this would be cheating as defined by Texas Tech University and stated in the syllabus).
Consider an asset that generates $3,000 in 5 years and $5,000 in 1 year; discount rate - 6% (These are uneven cash flows- there is no pattern).
2. Consider an asset that pays $500 per year for 8 years (This is an annuity- it is the same cash flow, evenly spaced, for a finite time (it has an end)).
3. Consider an asset that pays $50 per year starting at the end of year 3 (This is a delayed perpetuity- it is the same cash flow evenly spaced forever, but does not begin until a future date).

Answer 1

1. Since the last cash flow occurs at year 5, the timeline ends at 5th year.

2. Since the same cash flow for a finite time of 8 years, the timeline ends at 8th year.

3. The 3 dots at the end of the timeline indicates a perpetuity.

Step-by-step explanation:

A timeline refers to a line that shows the timing and amount of cash flows. Therefore, we have:

1. Consider an asset that generates $3,000 in 5 years and $5,000 in 1 year; discount rate - 6% (These are uneven cash flows- there is no pattern).

Note: See number 1 in the attached photo for the timeline.

The fact that the last cash flow occurs at year 5 makes the timeline to end at 5th year.

It can also be seen in the timeline that the 6% discount rate is shown in between the previous period and the next.

2. Consider an asset that pays $500 per year for 8 years (This is an annuity- it is the same cash flow, evenly spaced, for a finite time (it has an end)).

Note: See number 2 in the attached photo for the timeline.

The fact that the same cash flow for a finite time of 8 years makes the timeline to end at 8th year.

3. Consider an asset that pays $50 per year starting at the end of year 3 (This is a delayed perpetuity- it is the same cash flow evenly spaced forever, but does not begin until a future date).

Note: See number 3 in the attached photo for the timeline.

It should be noted the 3 dots at the end of the time line indicates a perpetuity.